Oil and Bernanke’s money printing myth

Oops, I guess Federal Reserve Chairman Ben Bernanke and the Fed aren't printing money after all. Big Ben Bernanke went on “60 Minutes” again for the first time since the eve of "quantitative easing 1" when he led us to believe things were getting better before he announced the Fed would increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion and purchase up to $300 billion of longer-term Treasury securities. Yet don't call that 'printing money" because as Mr. Bernanke told 60 Minutes that is a myth.

A myth? That's right. He said that, "One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we're doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that's what we're going to do."

Yet the currency that the banks have for lending is up significantly. Of course, I guess that is just on paper which I suppose does not need as much ink. “60 Minutes” said that, " Last month, Bernanke announced the Fed's intent to buy $600 billion in U.S. Treasury securities, which is supposed to have the effect of lowering rates on long term loans for things like cars and homes. Bernanke wanted to emphasize that these are the Fed's own reserves. It's not tax money. It does not add to the federal deficit."

Of course the traders of the dollar and commodity bulls are not convinced. After the Fed announced its QE2, the dollar tanked and commodities soared. Whether you are printing money or not it has had the same impact on the markets and those reserves you have, had to come from somewhere. Yet today the dollar is a believer.

After Ben's interview came a surprisingly bad jobs report that sent the dollar tanking and the oil to a 25-month high. Ben gave a bleak outlook on the jobs market. He told “60 Minutes,” "The unemployment rate is just not going down. Unemployment is just about the same as it was in mid-2009, when the economy started growing. So, that's a major concern. And it looks that at current rates, that it may take some years before the unemployment rate is back down to more normal level. Between the peak and the end of last year, we lost eight and a half million jobs. We've only gotten about a million of them back so far. And that doesn't even count the new people coming into the labor force. At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate. Somewhere in the vicinity of say five or six percent, four or five years. The other aspect of the unemployment rate that really concerns me is that more than 40 percent of the unemployed have been unemployed for six months or more. And that's unusually high. And people who are unemployed for such a long time, their skills erode. Their attachment to the labor force diminishes and it may be a very, very long time before they find themselves back in a normal working position."

Cold temperatures not only in the U.S. but in Europe helped petroleum to rally last week, but the rebound in the dollar and the fact that oil is way ahead of the demand expectation curve is moderating the gains. The month of December is traditionally a very strong month for oil into the first of the year.

The jobs number was not the only report that did not seem to jibe with the other more optimistic economic numbers. We also saw an anomaly in gasoline demand. Last week gasoline demand rose 0.4 percent to an average 8.87 million barrels a day. Consumption, averaged over four weeks, was down 0.5 percent from a year earlier. That does not seem to suggest that the consumers are as strong as some of the retail sales and consumer confidence seem to indicate. Retail gas prices are surging as Trilby Lundberg, the princess of the pump said that average price for regular gasoline rose 3.92 cents to $2.9121 a gallon.

We have seen problems in Europe and U.S. imports are down as well as a rash of refinery outages. That should lead to an increase of crude inventory to the tune of 2.0 million barrels. We should see gas inventory fall by 3 million barrels and distillates by 2 million barrels. Refinery runs should fall by 1.5 percent keeping them near historic lows.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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